Despite the turmoil in Chinese equity markets, Brazil is the riskiest of the major emerging markets, according to a survey of European credit managers.
The survey, conducted by ratings agency Fitch earlier this month, found that more than three-quarters of managers believed Brazil to be most at risk from contagion through fiscal imbalances, political issues, and the fallout from rising US interest rates.
Brazil slipped into recession last year, and in the second quarter of 2015 its economy shrunk by 1.6% year-on-year. The International Monetary Fund has forecast Brazil’s economy to shrink by 1% overall this year, while Fitch predicted a 1.5% contraction.
Source: TradingEconomics.comFitch said a program of “macroeconomic
adjustment” brought in by Brazilian President Dilma Rousseff could improve
confidence and credibility, but poor growth prospects could overshadow attempts
to reboot the economy.
“Latin American non-financial corporates, led by those in Brazil, have significantly increased their dollar borrowing while US rates have been low, increasing their exposure to a rising dollar,” Fitch said. “As the Central Bank of Brazil has tightened policy and allowed the real to depreciate, Brazilian issuers face rising internal and external interest rates during a recession.”
The survey—which quizzed managers responsible for €7.8 trillion ($8.6 trillion)—found that 46% of respondents believed corporates would face the biggest challenge to refinancing over the next 12 months.
However, the ratings agency also pointed out that Brazil—along with India—was “cushioned” to an extent from external risks by high cash reserves and low reliance on external portfolio inflows.
In contrast to Brazil’s problems, Fitch said India had made “more tangible progress in reducing its exposure to Fed-driven market volatility” in the past two years.
“Structural reforms and the resulting pick-up in investment support India’s growth outlook, and we forecast growth to accelerate to 8.1% in 2017,” the ratings agency said. “But Fed tightening will not be risk-free for India, due to the possibility of large foreign outflows from its debt and equity markets.”
Meanwhile, China’s equity markets have plunged in recent weeks, with A-shares falling 34% in dollar terms in the past month. In total the market collapse has wiped out $3.5 trillion of value, according to Bloomberg.
Yesterday markets rebounded, but China’s regulator has suspended trading on roughly 1,300 securities. In addition, the China Securities Regulatory Commission has banned shareholders with company stakes higher than 5% from reducing their investments for the next six months, in an effort to stabilise markets.
Related: Is Emerging Market Debt Still Worth the Risk? & Moody’s: The Knock-On Effects of a Tighter Fed